Beverage - All posts tagged Beverage

Shares of Campbell Soup and Kellogg are higher today on takeover speculation.

But investors may be missing the fact that both companies could prove tough takeover targets because families and a foundation control sizable blocks of stock.

Erie Times-News/Associated Press

Following a Wall Street Journal article today about possible takeover targets for Brazilian investment firm 3G mentioning Campbell Soup (CPB) and Kellogg (K), shares of each are higher: Campbell is up 4.7% to a recent $45.06, and Kellogg has gained more than 2% to $65.85.

But a big impediment to any deal for Campbell is that four descendants of founder John Dorrance control about 41% of Campbell shares, giving them effective blocking rights on any deal. At Kellogg, the W.K. Kellogg Foundation Trust owns 21% of the shares. While the foundation doesn’t own enough stock to prevent a deal, it would be hard to get one done without its support.

3G is known for deep cost-cutting moves when it buys companies and its harsh strategy might not sit well with paternalistic family members or foundation trustees. Campbell has long been a rumored takeover target, and the lack of any deal so far could reflect family influence.

It’s possible, of course, that any objections by families or trusts to a 3G deal could be overcome. But Heinz didn’t have a large block of family-controlled shares, making it an easier target for 3G and its partner, Berkshire Hathaway (BRKB).

Goldman Sachs has taken a look at Latin American food & beverage companies–and has mixed feelings about what it sees.

AP/dapd

“LatAm coverage is among the most attractive in global staples for growth, margins and competitive positioning,” Goldman analysts Luca Cipiccia and Joao Barrieu wrote in a report today. “The market structure favors large-scale players and consolidation.” They expect profit margins to grow in 2013 and dividends to increase.

The big downside: valuations, which are near record highs.

Case in point: Coca-Cola Femsa (KOF). The company has strong fundamentals but its valuation is extreme relative to other food & beverage companies. It has a P/E of 28.5 times 2013 earnings, according to Goldman, above Femsa’s (FMX) 23.4 times and Brasil Food’s (BRF) 20.8. That premium multiple will limit Coca-Cola Femsa’s upside to about 5%, Goldman’s analysts say. They started the stock at a neutral.

On the other hand, Cipiccia and Barrieu love Brasil Foods. They name it their top pick among Latin American consumer-staple companies, and start it as a buy and put it on their focus list. They write:

…we believe the company is on the verge of a critical turn in profitability and, potentially, strategic development: (i) We expect margins in 2013 to rebound following the asset disposals and category suspensions imposed by TCD (“Termo de Compromisso de Desempenho”); (ii) We see a medium-term opportunity to significantly raise profitability and returns by increasing exposure to the value added processed food category, potentially also outside its meat/dairy based portfolio today. Announced upcoming potential board changes (i.e., Abilio Diniz, who has vast experience in food retailing) may in our view accelerate this process. (iii) The stock exhibits attractive valuation relative to peers, trading on 2014 P/E of 16.5x and EV/EBITDA of 10.2x, vs. 20.0x and 11.5x for the sector.

Cipiccia and Barrieu are also bullish on Femsa (FMX), which they say offers a combination of safety and growth. They write:

Femsa remains a compelling vehicle to participate in the growth in the Mexican consumer, through the rapid growth of the Oxxo retail format, which continues to outperform other Mexican retailers through consistent organic growth and network expansion. FMX’s 49% stake in KOF adds exposure to the less cyclical beverage category and KOF’s increasing importance in LatAm and globally to the Coca Cola (KO) system. Lastly, the 20% stake in Heineken represents a stable cash stream and, should it choose to do so, potential fire-power to return cash to shareholders, or to finance larger acquisitions, now that management has signaled its interest in entering new formats (pharmacies/fast food) and regions.

Femsa was also started as a buy and put on Goldman’s focus list, as the shares could gain more than 20%.

About Emerging Markets Daily

Emerging markets have been synonymous with growth, but the outlook for individual nations is constantly changing. Countries from Brazil and Russia to Turkey face challenges including infrastructure bottlenecks, credit issues and political shifts. Barrons.com’s Emerging Markets Daily blog analyzes news, data and research out of emerging markets beyond Asia to help readers navigate the investment landscape.

Barron’s veteran Dimitra DeFotis has been blogging about emerging market investing since traveling to India and Turkey. Based in New York, she previously wrote for Barron’s about U.S. equity investing, including cover stories and roundtables on energy themes. Dimitra was among the first digital journalists at the Chicago Tribune and started her career as a police reporter at the Daily Herald in the Chicago suburbs. Dimitra holds degrees from the University of Illinois and Columbia University, where she was a Knight-Bagehot Fellow in the business and journalism schools. She studies multiple languages and photography.